30 MCQs AND 6 SHORT ANSWERS :

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1. (TCO 1) What is the goal of financial management for a sole proprietorship? (Points : 3)

       decrease long-term debt to reduce the risk to the owner

       maximize net income given the resources of the firm

       maximize the market value of the equity

       minimize the tax impact on the proprietor

       minimize costs and increase production

 

 

Question 2.2. (TCO 1) Which of the these activities is not a capital budgeting task? (Points : 3)

       determining the amount of cash needed on a daily basis to operate a firm

       identifying assets that produce value in excess of the cost to acquire those assets

       evaluating the size and timing of future cash flows from a project

       evaluating the risks associated with a proposed project

 

 

Question 3.3. (TCO 1) Market value is important to the financial manager because: (Points : 3)

       It reflects the value of the asset, based on generally-accepted accounting principles.

       Is a crucial component of the balance sheet, and can impact the financial statements.

       Market value reflects the amount someone is willing to pay today for an asset.

       The market value of an asset reflects its historical cost.

       None of the above

 

 

Question 4.4. (TCO 1) Which of the following is true regarding income statements? (Points : 3)

       It reveals the net cash flows of a firm over a stated period of time.

       It reflects the financial position of a firm as of a particular date.

       It records revenue only when cash is received for the product or service provided.

       It records expenses based on the recognition principle.

       None of the above is a true statement.

 

 

Question 5.5. (TCO1) Telemarket Inc. has sales of $625,000. They paid $43,000 in interest during the year and depreciation was $79,000. Administrative costs were $100,000 and other costs were $160,000. Assuming a tax rate of 35 percent, what is Telemarket’s taxes figure? 

 

                   (Points : 3)

       $100,100

       $85,050

       $112,700

       $72,900

 

 

Question 6.6. (TCO 1) Home Best Hardware had $315,000 in taxable income last year. Using the tax rates provided in Table 2.3, what is the approximate average tax rate? (Points : 3)

       35%

       39%

       34%

       32%

 

 

Question 7.7. (TCO 1) Pizza A had earnings after taxes of $600,000 in the year 2008, and 300,000 shares outstanding. In year 2009, earnings after taxes increased to $750,000, and 25,000 new shares were issued for a total of 325,000 shares. What is the EPS figure for 2008? (Points : 3)

       $2.0

       $2.21

       $0.50

       $0.47

 

 

Question 8.8. (TCO 1) An income statement: (Points : 3)

       reveals the net cash flows of a firm over a stated period of time.

       reflects the financial position of a firm as of a particular date.

       shows the revenue and expenses based upon selected accounting methods.

       records revenue only when cash is received for the product or service provided.

       records expenses based on the recognition principle.

 

 

Question 9.9. (TCO 1) Green Leaf Nursery has EBIT of $250,000, interest of $30,000, taxes of $50,000, and depreciation of $80,000. What is the company’s operating cash flow? (Points : 3)

       $297,200

       $280,000

       $340,000

       $270,000

       $250,000   

 

 

Question 10.10. (TCO 3) Mark deposited $1,000 today, in an account that pays eight percent interest, compounded semi-annually. Which one of the following statements is correct concerning this investment? (Points : 3)

       Mark will earn more interest in year 4 than he will in year 3.

       Mark will receive equal interest payments every six months over the life of the investment.

       Mark would have earned more interest if he had invested in an account paying 8 percent simple interest.

       Mark would have earned more interest if he had invested in an account paying annual interest.

       Mark will earn less and less interest each year over the life of the investment.

 

 

Question 11.11. (TCO 3) Mr. Smith will receive $6,500 a year for the next 14 years from his trust. If the interest rate on this investment is eight percent, what is the approximate current value of these future payments? (Points : 3)

       $93,000

       $53,500

       $84,300

       $52,000

 

 

Question 12.12. (TCO 3) Paper Pro recently purchased a printing machine costing $97,000. The company financed this purchase at 8.25 percent interest, with monthly payments of $2,379.45. How many years will it take the firm to pay off this debt? (Points : 3)

       3.0 years

       4.0 years

       4.25 years

       4.5 years

       5.0 years

 

 

Question 13.13. (TCO 3) Fine Oak Woodworks is considering a project that has cash flows of $6,000, $4,000, and $3,000 for the next three years. If the appropriate discount rate of this project is 10 percent, which of the following statements is false? (Points : 3)

       The current value of the project’s inflows is $13,000

       The approximate current value of the project’s inflows is $11,000

       The project’s inflows are higher than zero

       The project should be accepted because its present value is positive

 

 

Question 14.14. (TCO 4) You are considering an investment that will have the following cash flows: $54,000, $66,000, $(60,000), $57,000, and $120,000. The appropriate discount rate is 11 percent. What is the value of this investment? Note that the cash flow in brackets is negative. (Points : 3)

       $160,000

       $167,106

       $162,500

       Cannot be determined because one of the cash flows is negative

 

 

Question 15.15. (TCO 3) North Bank offers you an APR of 9.76 percent compounded semiannually, and South Bank offers you an effective rate of 9 percent on a business loan. Which bank should you choose and why? (Points : 3)

       South Bank because its effective rate is higher.

       North Bank because the APR is lower.

       South Bank because its effective rate is lower.

       North Bank because its effective rate is lower.

 

1. (TCO 3) Which one of the following will increase the future value of a lump sum invested today? (Points : 3)

       decreasing the amount of the lump sum

       increasing the rate of interest

       paying simple interest rather than compound interest

       paying interest only at the end of the investment period

       shortening the investment time period

 

 

Question 2.2. (TCO 3) Which one of the following best exemplifies a perpetuity? (Points : 3)

       a mortgage of $860 a month for 30 years

       $2,000 annual payments from a trust fund indefinitely

       social security payments of $2,500 a month for life

       student loan payments of $600 a month for three years

       $250 a month over the life of a lease

 

 

Question 3.3. (TCO 3) Fanta Cola has $1,000 par value bonds outstanding at 12 percent interest. The bonds mature in 25 years. What is the current price of the bond if the YTM is 13 percent? Assume annual payments. (Points : 3)

       $1078

       $1085

       $927

       $1000

 

 

Question 4.4. (TCO 6 and 8) A bond's indenture agreement will include which of the following? (Points : 3)

       description of any loan collateral

       call provisions

       total amount of the bond issue

       protective covenants

       all of the above

       none of the above 

 

 

Question 5.5. (TCO 3) Bonds issued by Blue Sky Airlines have a face value of $1,000 and currently sell for $1,180. The annual coupon payments are $125. If the bonds have 20 years until maturity, what is the approximate YTM of the bonds? (Points : 3)

       10.50%

       11.50%

       11.75%

       12%

 

 

Question 6.6. (TCO 3) Bean Coffee issued preferred stock many years ago. It carries a dividend of $8 per share, fixed. As time has passed, yields have decreased from the original eight percent (at the time of issuance) to six percent. What was the current price of the stock? Hint: Yield is the same as required rate of return. (Points : 3)

       $100

       $133

       $102

       $86.40

       None of the above

 

 

Question 7.7. (TCO 3) Intelligence Research, Inc. will pay a common stock dividend of $1.60 at the end of the year. The required rate of return by common stockholders is 13 percent. The firm has a constant growth rate of nine percent. What is the current price of the stock? (Points : 3)

       $35

       $40

       $27

       $29

 

 

Question 8.8. (TCO 3) Royal Electric paid a $2 dividend last year. The dividend is expected to grow at a constant rate of five percent over the next three years. Common stockholders require a 12 percent return. What are the values of the dividends for years 1, 2 and 3, respectively? (Points : 3)

       $2, $2.10 and $2.205

       $2, $2.205 and $2.315

       $2.10, $2.205, and $2.315

       $2.10, $2.205 and $2.456

 

 

Question 9.9. (TCO 6) The market where new securities are offered is called the _____ market. (Points : 3)

       primary

       main

       secondary

       principal

       dealer

 

 

Question 10.10. (TCO 6) The smallest firms listed on NASDAQ are in the NASDAQ _____ Market. (Points : 3)

       National

       Capital

       Regional

       Global Select

       Global

 

 

Question 11.11. (TCO 6) The yield to maturity on a bond is: (Points : 3)

       equal to the coupon rate divided by the current market price.

       another name for the current yield.

       equal to the annual interest divided by the face value.

       the current required market rate.

       another name for the coupon rate.

 

 

Question 12.12. (TCO 6) Star Industries has one outstanding bond issue. An indenture provision prohibits the firm from redeeming the bonds during the first two years. This provision is referred to as a _____ provision. (Points : 3)

       deferred call

       market

       liquidity

       debenture

       sinking fund

 

 

Question 13.13. (TCO 8) Which of the following is true regarding bonds? (Points : 3)

       Most bonds do not carry default risk.

       Municipal bonds are free of default risk.

       Bonds are not sensitive to changes in the interest rates.

       Moody’s and Standard and Poor’s provide information regarding a bond’s interest rate risk.

       None of the above is true

 

 

Question 14.14. (TCO 6) Which of the following best describes a floating-rate bond? (Points : 3)

       A bond that adjusts the coupon payments based on an interest rate index, such as the T-bill.

       A bond that is issued by the U.S. government.

       A bond that adjusts the coupon payment date.

       A bond that has no coupons, but adjusts the face value payment based on inflation.

 

 

Question 15.15. (TCO 6) Which of the following are not true regarding convertible bonds? Select all that apply: (Points : 3)

        Are extremely rare 

        Can be exchanged for a fixed number of shares at maturity only   

        Can be exchanged for a fixed number of shares before maturity 

        Allow the holder to require the issuer to buy the bond back

 

1. (TCO 1) In a general partnership, each partner is personally liable for: (Points : 3)

       the partnership debts that he or she personally obtained for the firm.

       his or her proportionate share of all partnership debts, regardless of which partner incurred that debt.

       the total debts of the partnership, even if he or she was unaware of those debts.

       the debts of the partnership, up to the amount he or she invested in the firm.

       all personal and partnership debts incurred by any partner, even if he or she was unaware of those debts.

 

 

Question 2.2. (TCO 1) Which one of the following is classified as a current asset? (Points : 3)

       land

       accounts payable

       equipment

       inventory

       note payable

 

Question 3. 3. (TCO 1) Can you provide some examples of recent, well-known unethical behavior cases? Explain the situation in one or two sentences. (Points : 8)

      

 

Question 4. 4. (TCO 3) How can we apply the concept of time value of money in evaluating a mortgage? Present at least two scenarios. Briefly explain your rationale. (Points : 8)

 

Question 5. 5. (TCO 8) Are U.S. Treasury securities risk-free? Why or why not? Explain your rationale? (Points : 8)

 

 

Question 6. 6. (TCO 6) What are some of the benefits of issuing bonds with call and put provisions? Explain your rationale. (Points : 10)

 

    • 10 years ago
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